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					                                         COMMUNITY DEVELOPMENT AUTHORITY
                                            CITY OF MADISON, WISCONSIN



REPORT OF: Community Development Authority                           PRESENTED:
                                                                     REFERRED TO:
TITLE:               Proposed Amendments to Homebuyers               REPORTED BACK:
                     Assistance Program Handbook                     ADOPTED:
                                                                     PLACED ON FILE:
AUTHOR:             Percy Brown, Deputy Executive                    MOVED BY:
                    Director, Community Development                  SECONDED BY:
                    Authority                                        Yeas:    Nays:             Absent:

DATED:               June 2, 2005



Introduction
Under consideration are the proposed amendments to the Homebuyers Assistance (HBA) Program Handbook,
based on the CDA review of the Program. The CDA has been concerned about the decline in loan activity and
level of uncommitted funds in the Homebuyers Assistance (HBA) Program in recent years. During the first half
of 2005, the CDA researched and analyzed HBA loan statistics, housing and market trend data and reviewed
other home purchase assistance model programs across the country. Also, as part of this process, a homebuyer
focus group, comprised of lenders, realtors and builders, was formed for the purpose of hearing the participants’
views on (1) the current housing market, (2), changes that could be made to the Program, and (3) how the scope
of the Fund could be broadened to promote the development of affordable owner-occupied housing. The focus
group discussion went very well and many ideas and suggestions emerged from the group. The purpose of this
report is to present to the Council, the history, program structure, recent experience, and recommendations on
where to go with the Program. The CDA at its meeting of June 9,2005, considered the report and proposed
amendments and recommends adoption.


History
The HBA Program was created in 1988 with a two-fold goal of increasing owner-occupancy and conserving the
older housing stock in the downtown and Isthmus areas. On June 6, 2000, the HBA Program, along with the
other City rehab loan programs were expanded to include the entire City of Madison. Since 1997, a total of 46
loans have been issued to assist in the acquisition and rehabilitation of 60 units for a total City investment in
excess of $1.0 million. Over 75 percent of the properties assisted were single-family structures. The funds to
fund the Program have come primarily from loan repayments. The HBA loan fund balance has grown steadily
in recent years, largely due to the favorable interest rate climate and the significant increase in the number of
HBA loan recipients who have opted to refinance their first mortgages and pay off their HBA loans. Of the 46
loans made since 1997, 32 or 70% have been repaid with two thirds of the borrowers repaying their loans
continuing to remain in their homes.




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During the past eight years, the loan and principal repayment activities of the HBA Program were as follows:

    YEAR                NO. OF LOANS                          DOLLAR AMOUNT               PRINCIPAL INCOME
    1997                       11                                  $234,000                    $ 22,696.87
    1998                        5                                   140,000                     139,364.88
    1999                       17                                   360,000                      80,385.39
    2000                        7                                   150,000                     230,566.92
    2001                        4                                   120,000                     219,884.82
    2002                        2                                    50,000                     278,911.82
    2003                        0                                         0                      82,737.51
    2004                        0                                         0                         922.60
    TOTALS:                    46                                 $ 1,054,000               $ 1,055,470.81


Program Purpose

With a goal of increasing owner-occupancy in the City of Madison, the HBA Program was created to offer four
primary benefits/incentives to buyers: (1) it lowers the overall cost of financing by providing the second
mortgage below market interest rate thus making the property more affordable; (2) with a down payment of
more than 20% as can be provided by the HBA Program, buyers are not required to pay private mortgage
insurance; (3) the rehab component with the technical assistance provided by City rehabilitation staff (not
typically provided by private lenders) is an important feature, particularly for the purchase of older homes in
need of repairs; and (4) participation in the HBA Program reduces the risk associated with the primary
mortgage, which is crucial to the lender, particularly in “borderline cases.”


Program Operation
The HBA Program provides loans to eligible buyers to finance a portion of the acquisition and rehabilitation
cost of an eligible property. The maximum loan cannot exceed 30% of the acquisition and rehabilitation cost of
the project. The property must be a one-to-four-unit owner-occupied building, (this includes condominiums)
which is in need of rehabilitation of at least 5% of the purchase price. A cash down payment of 5% of the total
project cost is required. Additional funds needed for the project will be provided by a conventional lender. An
example of how a loan works follows:
    Example 1 – Current Homebuyers Assistance Loan Program
    A single-family dwelling listed for sale at $150,000 with $10,000 worth of rehabilitation work would total
    as follows:
    1. Cost of property           $150,000
    2. Rehabilitation Costs         10,000
    3. 1st Mortgage Closing Costs    2,000
       TOTAL Project Cost         $162,000
    The total cost of the above would breakdown as follows:
    1. 5% minimum borrower’s cash down payment                                  $ 8,100   ($162,000 x 5%)
    2. City Homebuyer’s Assistance Loan
       (up to a maximum loan of $20,000)                                        $20,000    ($10,000 for rehabilitation +
                                                                                          $10,000 for additional down
                                                                                          payment & closing costs)
    3. First mortgage loan                                                  $133,900

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    TOTAL COST                                                    $162,000

The current interest rate for the HBA Program is 4.25%. The annual rate of interest to be charged for the HBA
loans cannot exceed the cost of borrowed funds to the City of Madison in the year plus a service fee of 1%,
rounded upward to the nearest one-quarter of one percent. The term of the loan is twenty years. To qualify for a
loan, a borrower’s annual income cannot exceed 125% of the Dane County median income. The maximum loan
amount is $20,000 for a single-family structure and $10,000 for each additional unit in a two-to-four-unit
structure. Also, there is a special Program provision that allows a construction loan to be made to a developer
who agrees to sell the property after rehabilitation to an eligible owner-occupant.

The HBA Program is a City-funded, revolving loan program. The Program is self-sufficient with funds derived
from loan pay-offs and principal repayments. At the discretion of the DPD Director, loan funds can be
transferred among the various City rehabilitation loan funds as needed.


Program Challenges
The Program did very well in 1999 and prior years, but has since declined largely due to rising housing costs
and other changes in the housing market and the emergence of other less restrictive products by lenders and
other down payment assistance programs. The 2004 median sales price for a single-family home in Madison is
$203,970. In today’s market, low-income buyers often have to seek and combine multiple sources of down
payment assistance in order to afford to purchase a home. These buyers are competing for limited down
payment assistance funds, which are being offered by such programs as the Dane County Housing Authority
Down Payment Assistance Program, Down Payment Plus Affordable Housing Program – Wisconsin
Partnership for Housing Development, City of Madison “Home Buy” Down Payment Assistance, South Central
Wisconsin Housing Foundation, and WHEDA Home Plus. Other special programs include Habitat for
Humanity and Movin’ Out. An example of a typical a loan to a low- income family using multiple sources of
down payment assistance follows:




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         Example 2 - Using Multiple Down Payment Assistance Programs

         Assumes borrows income is $51,240 for 4 persons, or $4,270 mo. (NOTE: PER HOME-BUY INCOME
         MUST BE <70%DCMI in order to stack funds.)

         Borrower must contribute a minimum down payment of 1% of the Purchase Price from their own funds.

         Purchase Price                                            $175,000
         Closing Costs                                             $ 2,500
         TOTAL FUNDS NEEDED TO CLOSE                               $177,500
         Minimum Borrowers Investment 1%                          ($ 1,750)
         HOME-BUY                                                 ($ 3,100)
         Down Payment Plus                                        ($ 5,000)
         Housing Foundation-Home Start                            ($ 3,000)
         1st Mortgage Loan                                         $164,650      94% LTV (Loan-to-Value)
         HOME BUY 2nd Mortgage Loan                                 $ 3,100
         TOTAL 1st & 2nd MORTGAGES                                 $167,750      95.9% CLTV (Combined Loan-to-Value)
         Total of 1st, 2nd, down payment loans                     $175,750      100.4% total CLTV


         P&I -1st mortgage                                         $ 947.82 @ 5.625% 30 years
         Taxes                                                     $ 315.00
         Hazard Insurance                                          $ 35.00
         PMI                                                       $ 60.00 necessary due to LTV<80%)
                                                                  $1,357.82
         Housing to income ratio 31.8%
         70% DCMI $51,240 - 4 persons = $4,270 mo.

In recent years the mortgage interest rates have been at historic lows. The HBA program has performed better
when the primary mortgage interest rates were up (typically 2% higher than the City’s second mortgage rate).
Unless there is a significant spread between the City’s second mortgage rate and the conventional rate,
borrowers tend not to go through the trouble of having two separate mortgages. Often, the borrowers do not
have sufficient incomes to support the added debt service resulting from a City’s second mortgage installment
loan. Also, there is often not enough equity in the property at time of purchase for the buyer to secure the City’s
second mortgage loan unless a larger down payment is made.


Recommendations:
1. Maximum Loan Amount: Increase the maximum loan amount to $40,000 for a single-family structure and
   $10,000 for each additional unit up to a maximum of $110,000 for an eight-unit structure. There has not
   been an increase in the maximum loan amount since the Program was created in 1988 to reflect rising
   construction costs and home values. From 1988 to present, the average property values for single-family
   homes in Madison rose dramatically from $70,593 to $223,000, representing more than a 300% increase in
   value. During the past year alone, the value of the average single-family home increased by 8.6%. As
   single-family houses in Madison age, they are increasingly becoming more costly to repair and maintain.
   Most first-time homebuyers, after meeting their down payment requirements, have little or no resources on
   hand to make repairs during the first few years in their homes. The CDA believes that the recommended
   increase in the loan amount is reasonable to enable borrowers to bring their properties up to the City code

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    and related energy efficient standards and make sufficient improvements that would have a long lasting
    impact on the quality and maintenance of their homes.
2. Deferred Payment Loans: Provide deferred payment loans (DPL) to households earning 80% of the Dane
   County median income or less. After ten years, the DPL (the original principal loan amount plus a one-time
   10% interest charge) will convert to an installment loan at an interest rate equal to the rate at the time the
   loan was closed, payable over 15 years. The principal loan amount and a one-time 10% interest charge
   would be due if the owners sells, vacates or transfers the property during years 1 to 10. With the median
   sales price of a single-family in Madison at $203,970, low-income first- time homebuyers are not able to
   take on the added debt burden of a second mortgage installment loan. The deferred loans will make the
   homes more affordable and thus reduce the cost of the home to the borrower. Although the deferred loans
   will convert to installment loans in ten years, the CDA believes that ten years is a sufficient amount of time
   to allow the borrowers to build up equity in their homes and gain the economic means to make the low-
   interest installment loan payments. It also ensures that loan principal is being returned to the Fund within a
   reasonable time frame for future loans. During the past ten years the average values of single-family homes
   in Madison have nearly doubled (the value increased from $120,000 to $223,000). The installment loan
   component of the Program will remain in place for persons earning more than 80% of the Dane County
   median income. Deferred loans will not be made to households earning more than 80% of the Dane County
   median income. The installment loans will insure that the loan fund will remain a self-sufficient revolving
   loan fund. The loan payback rate on the installment loans is very good. Of the 46 loans made since 1997, 32
   or 70% have been repaid.
3. Down Payment Requirements: Lower the down payment requirement to 3% of the total project cost (cost
   of property + rehabilitation costs + closing costs), of which 1% must be from borrower’s own funds. The
   current down payment requirement is 5% of the total project cost The 3% down payment is in keeping with
   today’s conventional lending practices. The CDA used the 3% down payment requirement for its previous
   successful $18 million “Own Downtown” Single-Family Revenue Bond Program in 1988. During an
   eighteen-month period all of the bond proceeds were used for 312 mortgages, with an average purchase
   price of $56,660 per loan. The lower down payment would open the door to home ownership for low-and
   moderate-income households by making the units more affordable.
4. Minimum Rehab Requirement: Increase the minimum rehab requirement from 5% to 10% of the purchase
   price. As an example, rehabilitation of at least $17, 500 would be required for a home with a purchase price
   of $175,000, which is about equal to the 2004 average loan size for a City single-family rehabilitation loan,
   which is $17, 264. Addressing the rehab needs of these older properties upfront (at time of acquisition) will
   ensure long- term housing quality and affordability for the owner.
5. Down Payment Matching Loans: Provide no interest deferred payment loans to eligible households
   earning 80% or less of the Dane County median income in an amount up to $3,100 to match the City’s
   “Home-Buy” Down Payment Assistance funds going into a transaction. In operation since June 1991, the
   successful “Home-Buy” Program provides no interest deferred payment loans up to $3,100 to qualifying
   homebuyers to partially cover the down payment/closing costs of the first mortgage loan. The “Home-
   Buy” Program is funded by the State Department of Administration Division of Housing and serves first-
   time homebuyers earning 80% or less of the Dane County Median income. “Home-Buy” funds are often
   combined with other down payment assistance programs in an effort to meet the down payment needs of the
   borrowers. (See example of loan on page 4). With the high cost of housing in Madison, low-income
   homebuyers often need more down payment assistance than what is currently provided by the “Home-Buy”
   Program. The HBA matching down payment assistance funds will be targeted primarily to Section 8
   eligible households. An example of a loan (Section 8 homeownership option), using HBA matching funds
   follows:


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    Example 3 - Section 8 Homeownership Option
    Assumes a $40,000 deferred HBA loan of which $22,500 is for down payment and $17,500 Rehab.
    Assumes borrower’s income is $51,240 for 4 persons, or $4,270 mo. (NOTE: PER HOME-BUY INCOME
    MUST BE <70%DCMI in order to stack funds.)
    Borrower must contribute a minimum down payment of 1% of the Total Project Cost from their own funds.
    Purchase Price                                                 $175,000
    Rehab Costs                                                    $ 17,500

    TOTAL PROJECT COST                                             $192,500
    Closing Costs                                                  $ 2,500

    TOTAL FUNDS NEEDED TO CLOSE                                    $195,000

    Minimum Borrowers Investment 1%                               ($ 1,925)
    HBA down payment Funds                                        ($ 22,500)
    HBA Rehab Funds                                               ($ 17,500)
    HOME-BUY                                                      ($ 3,100)
    Down Payment Plus                                             ($ 5,000)
    Housing Foundation-Home Start                                 ($ 3,000)
    1st Mortgage Loan                                              $141,975       75.5% LTV
    HBA 2nd Mortgage Loan                                          $ 40,000
    TOTAL 1st & 2nd MORTGAGES                                      $181,975       96.7% CLTV
    Total of 1st, 2nd, down payment loans                          $193,075       102.6% total CLTV

    After Rehab value assumes a 75% increase in value based on rehab costs:

    Purchase Price                                                 $175,000
    75% of Rehab costs                                             $ 13,125
                                                                   $188,125       96.7% CLTV

    P&I -1st mortgage                                              $ 817.29 @ 5.625% 30 years
    Taxes                                                          $ 315.00
    Hazard Insurance                                               $ 35.00
    PMI                                                            $      0 (Not necessary due to LTV<80%)
                                                                  $1,167.29
    Adjusted for an assumed Housing Assistance Payment (HAP) of $400. Then calculated the minimum
    income needed for varying family sizes.
    Total Payment                                               $1,167.29
    Less HAP                                                  ($ 400.00) Housing Assistance Payment
    Adjusted PITI                                               $ 767.29

    60% DCMI                                           60% DCMI                          50% DCMI
    $30,720, 1 person                                  $35,160, 2 persons                $36,600, 4 persons
    $2,560 Mo.                                         $2,930 Mo.                        $3,050 Mo.
    Housing to income ratios:
    30%                                                26.2%                             25.2%

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6. Short Term Construction Financing: Extend the term of the construction loans to developers from 12
   months to 24months. Under the current program guidelines, loans in the form of short term construction
   financing may be provided to qualifying developers in connection with single-family or multi-family
   residential construction or rehabilitation, infill housing and housing conversion projects. The loans are made
   to the developers at an interest rate of 1% above the City’s borrowing rate. The developers must agree to sell
   the assisted units to eligible buyers under the Program when construction is completed. The CDA is
   proposing that the construction loan will be due in twenty-four months. This would allow the developers
   sufficient time to construct and or rehabilitate and market the units to eligible buyers. The maximum loan
   amount would be $40,000 for a single-family structure and $10,000 for each additional unit up to a
   maximum of $110,000 for an eight-unit structure.
7. Land Acquisition: Change the Program Eligibility Costs Requirements to include the cost of land
   acquisition and the cost of land-write down for the development of affordable owner-occupied housing for
   eligible buyers under the HBA Program. Short-term financing up to a maximum of $250,000 will be
   provided to qualifying developers to assist in land acquisition for affordable housing. (Please note that the
   $250,000 limit may be increased by $50,000, subject to CDA review and approval). Other City funds,
   Private, and non-City funds must be used to match these “seed monies”. The maximum term of the
   financing is three years. The developer must agree that the land will be developed with affordable owner-
   occupied housing within a three-year period. The short-term construction financing as proposed will provide
   a unique opportunity for the City to leverage limited public dollars with private dollars to promote increase
   owner-occupancy Citywide.
8. Property Eligibility Requirements: Change the HBA Program Property Eligibility Requirements to
   include up to eight units to be in keeping with the City’s 1 to 8-Unit Rental Rehabilitation Loan Program.
   The intent is to stimulate the rehabilitation and conversion of deteriorating rental properties into affordable
   owner-occupied condominiums and thus promote revitalization in the City’s older neighborhoods.




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